Race, Wealth, and Intergenerational Poverty

Despite an enormous and persistent black-white wealth gap, the ascendant American narrative is one that proclaims our society has transcended the racial divide. But wealth is a paramount indicator of social well-being. Wealthier families are better positioned to afford elite education, access capital to start a business, finance expensive medical procedures, reside in higher-amenity neighborhoods, exert political influence through campaign contributions, purchase better legal representation, leave a bequest, and withstand financial hardship resulting from an emergency.

The wealth gap is the most acute indicator of racial inequality. Based on data from the 2002 Survey of Income and Program Participation, white median household net worth is about $90,000; in contrast it is only about $8,000 for the median Latino household and a mere $6,000 for the median black household. The median Latino or black household would have to save nearly 100 percent of its income for at least three consecutive years to close the gap. Furthermore, 85 percent of black and Latino households have a net worth below the median white household. Regardless of age, household structure, education, occupation, or income, black households typically have less than a quarter of the wealth of otherwise comparable white households.

Since the election of Barack Obama, a growing belief has emerged that race is no longer a defining feature of one's life chances. But the extraordinary overlap between wealth and race puts a lie to the notion that America is now in a post-racial era. The smallest racial wealth gap exists for families in the third quartile of the income distribution where the typical black family has only 38 percent of the wealth of the typical white family. In the bottom income quartile -- the group containing the working poor -- a black family has a startlingly low 2 percent of the wealth of the typical white family.

Those who recognize the racial wealth gap but still embrace the idea of a post-racial America have crafted two explanations for this disparity. The first is that, in search of immediate gratification, blacks are less frugal when it comes to savings. Indeed, in an April lecture at Morehouse College, Federal Reserve Chair Ben Bernanke attributed the racial wealth gap to a lack of "financial literacy" on the part of blacks, particularly with respect to savings behavior.

Such an explanation, however, is not the case. Economists ranging from Milton Friedman to Marjorie Galenson to the recently deceased founder of the Caucus of Black Economists, Marcus Alexis, found that, after accounting for household income, blacks historically have had a slightly higher savings rate than whites. In 2004, economists Maury Gittleman and Edward Wolff also found that blacks save at a moderately higher rate than do whites, again after adjusting for household income. This indicates even greater black frugality because many higher-income blacks offer more support to lower-income relatives than do whites, further reducing their resources to save.

The second explanation given to support the post-racial narrative is that inferior management of assets owned by blacks has resulted in lower portfolio returns. However, recent research finds no significant racial differences in asset appreciation rates for families with positive net worth.

Recessions disproportionately affect black and Latino families. During the 1999–2001 recession, median household wealth fell by 27 percent for both Latinos and blacks, while it grew by 2 percent for whites. The current recession likely will worsen the racial wealth gap. Although whites are more likely than blacks to own their home, the share of black wealth in the form of housing is nearly twice as large as the white share. And with blacks far more likely than whites to have been steered toward sub-prime loans in discriminatory credit markets, the foreclosure crisis is bound to have a more deleterious effect on black wealth than on white wealth.

For example, a recent report on mortgage lending and race by the Institute on Race and Poverty at the University of Minnesota found that black Twin City residents earning over $150,000, in comparison to whites earning below $40,000, were twice as likely to be denied a home loan. Those fortunate (or unfortunate) enough to get a loan were more than three times as likely to have a sub-prime loan.

Economic studies also demonstrate that inheritances, bequests, and intra-family transfers account for more of the racial wealth gap than any other demographic and socioeconomic factor, including education, income, and household structure. These intra-familial transfers, the primary source of wealth for most Americans with positive net worth, are transfers of blatant non-merit resources. Why do blacks have vastly fewer resources to leave to the next generation?

Apart from the national failure to endow ex-slaves with the promised 40 acres and a mule after the Civil War, blacks were deprived systematically of property, especially land, accumulated between 1880 and 1910 by government complicity and fraud as well as seizures by white terrorists. During the first three decades of the 20th century, white rioters destroyed prosperous black communities from Wilmington, North Carolina, to Tulsa, Oklahoma. Restrictive covenants, redlining, and general housing and lending discrimination also inhibited blacks from accumulating wealth.

Indeed, the public sector already subsidizes asset acquisition. A 2004 report by the Corporation for Enterprise Development estimates that, even before the current financial crisis, the federal government allocated $335 billion of its 2003 budget in the form of tax subsidies and savings to promote asset development such as mortgage deductions. This excluded any corporate subsidies and tax savings and was more than 15 times the amount spent on education.

At issue is not the amount but the recipients. Those earning over $1 million a year received about one-third of the entire allocation, while the bottom 60 percent of earners received only 5 percent. Individuals in the bottom 20 percent typically received a measly $4.24 benefit. A more progressive distribution could be transformative for low-income Americans.

The surge in the post-racial perspective has moved us away from race-specific policies. However, wealth, given the racial disparity of its distribution, can be an effective non-race-based instrument to eliminate racial inequality. We could shift from an income-based to a wealth-based test for transfer programs. Policy eligibility based on net worth below the national median would qualify a large proportion of black households. Electronic financial records and publicly available home appraisals now make it easier to estimate net worth, and to avoid savings crowd-out, the program could be structured similarly to the Earned Income Tax Credit program, which uses a phase-out schedule to avoid work disincentives.

These changes in eligibility should be coupled with policies to promote asset building. For example, the American Dream Demonstration program uses individual development accounts to create match incentives for low-income savers. Another initiative, the Saving for Education, Entrepreneurship, and Downpayment, established children's development accounts (sometimes called "baby bonds") to create endowed trusts for children at birth. In the United Kingdom, since 2005, every newborn receives a trust ranging from 250 pounds to 500 pounds depending on familial resources.

In 2004, the American Saving for Personal Investment, Retirement, and Education (ASPIRE) Act was introduced in Congress to establish children's development accounts in the U.S. While the nation's first black president eschews race-specific policies, perhaps a strongly amended ASPIRE bill designed to progressively distribute funds based on familial net worth can be the policy that enables him to "bind ... [black America's] grievances ... to the larger aspirations of all Americans."

We envision a "baby bond" plan of much greater magnitude -- progressively rising to $50,000 or $60,000 for children in families in the lowest wealth quartile and accessible once the child turns 18 years of age. We also would determine eligibility for such a program based upon the net-worth position, rather than the income, of the child's family (all children whose family fell below the national median for wealth would receive baby bonds).

We should strive not for a race-neutral America but a race-fair America. For that to occur, the transmission of racial economic advantage or disadvantage across generations would have to cease. Public provision of a substantial trust fund for newborns from wealth-poor families would also go a long way toward achieving the ideal.